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Taxing times for misleading franchisor

Last Friday, the Federal Court made orders by consent declaring that the defendant accounting firm, Taxsmart, made false and misleading representations about its graduate program for young accounting graduates, in contravention of section 18 of the Australian Consumer Law.

This case is interesting because of the remedy sought by the ACCC and subsequently imposed by the court. Instead of seeking a pecuniary penalty, the ACCC sought compensation for those affected by the infringing conduct, with the Court ordering Taxsmart to refund all application and franchise fees (pursuant to its power under section 237 of the Australian Consumer Law (a power formerly found in section 87 of the Trade Practices Act 1974 (Cth) in respect of contraventions of section 52) totalling $260,400, in 36 monthly instalments. For most applicants, the average refund amount was approximately $60,000.

Taxsmart admitted to making the misleading representations in advertisements on job search websites and emails to interested students. The representations claimed that Taxsmart’s program would enable graduates with no work experience to satisfy requirements for registration as a tax agent by working on a 12 month program and paying a significant franchise fee. Taxsmart’s program did not however satisfy the requirements set by the Tax Practitioners Board. Taxsmart also terminated graduates’ employment before the 12 month period had elapsed.

As part of the agreed resolution of the prosecution, the court also made a declaration that the sole director of Taxsmart had aided, abetted, counselled or procured the making of the representations by the company. Relevantly, the director admitted that at the time he made the representations, he knew that the program (which he had designed) did not meet the requirements for registration as a tax agent.

The decision is significant as it shows a new-found willingness by the ACCC to use its power to seek to obtain compensatory redress as part of the enforcement proceedings, rather than leaving it to individuals affected by conduct to pursue their own costly individual legal action (the ACCC is also seeking compensatory orders against SensaSlim in another franchising case). Section 237 of the ACL enables either the injured person, who has suffered, or is likely to suffer, loss or damage because of the conduct, or the ACCC, to seek such orders as the Court thinks appropriate. The section represents a very powerful tool for the ACCC in prosecuting conduct under the ACL as it removes the need to prove that actual loss or damage was suffered, the only requirement being that the court be satisfied that a person is likely to suffer loss or damage.

As part of its decision, the court ordered Taxsmart to pay $10,000 to contribute to the ACCC’s costs, as well as obtaining an undertaking from Taxsmart and its sole director that they would not make the same or similar representations about the accounting graduate program or make offers of employment contingent on the payment of a franchise fee. The undertaking is to last for 3 years and was made in lieu of injunctive relief.

Compare jurisdictions:Arbitration

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